Bullish sentiment in new Samvat

The market continued to find new legs as it made net gains on strong volumes. The Nifty rose to new 2009 highs and closed at 5,142 points for week-on-week gains of 3.98 per cent. The Sensex behaved similarly, rising to 4.08 per cent to close 17,322 points. The Defty jumped 4.75 per cent as the rupee shot up.

Volumes were good all week and extraordinarily high on Friday. (This analysis is being written pre-Diwali session, where trading is usually token). Advances outnumbered declines and a large number of stocks were heavily traded. FIIs remained big net buyers while domestic institutions sold through most of the week. The BSE 500 rose 4.26 per cent while the Nifty Junior rose 6.4 per cent.

Outlook: The market reconfirmed its bullish status and the new upside targets would be in the range of Nifty 5,300. However, there could be another short-term correction next week pulling prices back till around the 4,950-5,000 level. Positive FII attitude remains a critical driver.

Rationale: The sequence of higher highs confirms that both the bullish long-term and bullish intermediate trends remain intact. However, the intermediate trend is now 13-weeks old and could reverse anytime. The market is overbought in the short-term. A fall below 4,900 would signal intermediate trend reversal with a target of 4,750.

Counter-view: High volumes and a series of new 2009 highs in pivotal stocks implies the market could continue to head North for an un-definable time. Balanced against that, this last burst of trading may have been triggered by traders exiting positions. Normally Indian operators ease off around Diwali and domestic institutions are also net-sellers at the moment. Hence, the FII attitude is vital to market direction – if they sell heavily, there will be no counter-parties at current prices.

Bulls & bears: A large number of pivotal stocks hit new 2009 highs last weeks and most were backed by strong volume expansions. Metals, for example, made a comeback with Sterlite, Sesa Goa both doing very well. Banks as a sector jumped over nine per cent with leaders like SBI and ICICI Bank both hitting new highs. Real estate also bounced up. Outside these sectors, there were scattered winners such as PTC, GVKPIL, Cairn, etc. This sort of pattern suggests further gains but it also sets up a tempting scenario for profit-booking and almost by definition, the market is overbought, with many individual stocks being over-extended and far ahead of reliable supports. Use trailing stop-losses to lock in profits, if there is a sharp reversal.

MICRO TECHNICALS

Bharti Airtel
Current Price: Rs 326
Target Price: Rs 345

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The stock may have seen a selling climax due to the intensifying competition, which has led to a tariff war among existing service providers. The stock fell on sustained hammering from Rs 435. On Thursday-Friday, there was volume multiplication without a further fall. This suggests all potential selling has been absorbed. Keep a stop at Rs 315 and go long since it could bounce till Rs 345.

Indiabulls Real Estate
Current Price: Rs 290.95
Target Price: Rs 270

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The stock has run into resistance between Rs 290-300, which has remained despite very high volumes. On a correction, it could fall till Rs 270 or lower. Keep a stop at Rs 295 and go short. If it does break Rs 295 and closes above Rs 300, reverse and go long with a stop at Rs 290 and a target of Rs 320.

Power Trading Corp
Current Price: Rs 103.8
Target Price: Rs 115

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The stock has made an extraordinary breakout on a big volume expansion. The formation's target would be about Rs 115. Keep a stop at Rs 101 and go long. Book 50 per cent profit at Rs 110 and move the stop up to Rs 106.

Sesa Goa
Current Price: Rs 354.7
Target Price: Rs 380

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Sesa Goa’s stock is making a sequence of successive record highs. Because of this, it is impossible to calculate a reliable target, however projections of Rs 380 appear to be reasonable. Traders are advised to keep a trailing stop at Rs 345 and go long at the counter. Raise the stop by 10-units for every 10-unit rise in the share price.

ICICI Bank
Current Price: Rs 959
Target Price: Rs 1,010

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The stock had a breakout to a 2009 high on strong volume expansion. It is difficult to calculate a target since anywhere between Rs 970 and Rs 1,010 is possible and there is no recent price history. Keep a stop at Rs 945 and go long. Raise the stop 10-units on every 10-unit rise.

Traders expect resistance above 5,100

The Nifty opened on a positive note but closed in the red on profit-booking at higher levels. Capital goods and telecom stocks fell but real estate and metal stocks remained firm on fresh buying. The market breadth was negative in contrast to a strong breadth earlier in the day. The Nifty futures & options saw a decline in open interest (OI), indicating profit-booking by bulls.

The Nifty October futures closed at a discount to the spot and shed 1.10 million shares in OI, indicating that bulls have started booking profit. The Nifty November futures, which saw a strong long build-up in the last couple of days, witnessed profit-booking at higher levels as they added 0.46 million shares in OI despite a trading volume of 1.35 million shares. The November futures also closed at a discount to the spot, indicating that bears have started creating short positions.

Profit-booking was seen in 4,700-5,000 strikes calls while a strong OI build-up was seen in 5,100-5,200 strikes calls. Interestingly, the OI in Nifty 5,100 call options increased by 1.39 million shares at close, though it had declined in intra-day trade. Bloomberg data suggest that 50 per cent trading in 5,100 call options was through sell-side trades and 44 per cent through buy-side trades. This means the bears have started writing 5,100 call options as they expect the Nifty will face strong resistance above 5,100.

Traders unwinded their short positions at 4,900, 5,000 and 5,100 puts as these added OI of 1.65 million shares through buy-side trades. The sharp decline in OI in the 5,100 put suggests that traders expect the Nifty to face resistance above 5,100.

Wheat carryover stock to rise 140% this year

India’s wheat carryover stock may rise 140 per cent in the next financial year on favourable climate leading to a near bumper crop estimates during the ensuing rabi season.

According to the United States Department of Agriculture (USDA), the country’s carryover inventory is estimated to swell up to 13.91 million tonnes as on April 1, 2010 compared with 5.8 million tonnes last year. The agriculture ministry had earlier estimated the output to be around 77.5 million tonnes during the 2009-10 rabi season as compared with a record 78.6 million tonnes in the previous season.

Apparently, the ban on wheat exports until March 2010 ensured adequate domestic availability. The government had imposed a ban on wheat exports and its products in 2007 which was further extended to March 2010.

The excess stock may necessitate India to allow the export of foodgrain, for which the Food and Agriculture Organisation (FAO) has been advocating since the past two years. Though, the sowing has started in agriculturally advanced states including Punjab and Haryana, yet analysts forecast current year’s output to be around the same level as last year.

“Since sowing has just begun which will continue till December, the acreage is unknown. Therefore, it is premature to forecast the output for this season,” said V K Chaturvedi, managing director of Usher Agro, a company engaged in processing of paddy and wheat.

Meanwhile, wheat contracts for near-month delivery on the National Commodity and Derivatives Exchange (NCDEX) rose 8.6 per cent in the last one month and 13.24 per cent since September 1. The volume is yet to pick after five months of the commodity’s relaunch at the futures platform which R Ramaseshan, managing director of NCDEX attributes to frequent government interventions.

While unveiling Commodity Insights Yearbook 2009, first of the annual book on commodities, V Shunmugam, chief economist of MCX said, “Information on commodities that constantly flows in and out of commodity markets remains the key driver of the price discovery and risk management process for which they were brought into the Indian economy.” Farmers can only benefit through the free flow of information about crop prospects, rainfall scenario, climate change and commodity’s price movements in the previous season which will help them decide sowing for the next season, he added.

Launching India Commodity Yearbook 2009, an annual book on commodities, Sanjay Kaul, managing director and CEO of National Collateral Management Services (NCMSL), and NCDEX-linked collateral manager, said, “Wheat stocks will rise further to 16.91 million tonnes if the current year’s output meets the estimate at 77.5 million tonnes.”

The latest Kotak Commodity Services’s report forecast wheat to remain firm on good demand from spot market.

FIIs overweight on India, but valuations may be a concern later

Powered by strong fund flows from foreign institutional investors, Samvat 2065 saw the benchmark index of the Bombay Stock Exchange rise 92 per cent. And the party looks set to continue in Samvat 2066, with most FIIs saying liquidity flows to emerging markets such as India will only improve in tandem with the stronger economic recovery across the globe.

The consensus among FIIs is valuation could be a concern going ahead, but that is still some way off.

“FIIs, by and large, may continue to remain overweight on India in the next Samvat year as well. India has a good growth story supported by strong fundamentals,” says DSP Merrill Lynch’s Head of Research Jyotivardhan Jaipuria. He believes markets are no longer cheap, but they probably have some way to go before they can be considered to have entered bubble territory.

FIIs made net investments of Rs 63,577 crore during Samvat 2065, of which the last quarter alone accounted for about half. Of the 60-odd A-group companies that have released shareholding data for the July-September quarter so far , FIIs have raised stakes in more than 40 firms across sectors.

According to Morgan Stanley analysts Ridham Desai and Chetan Ahya, increases in private consumption spending and higher government expenditure are driving the recovery. “But over the next six to nine months, we expect the investment cycle to accelerate the pace of recovery as capacity utilisation improves,” they say.

The rebound in global capital markets implies that investment proposals are likely to start rising from November and December. Most market players reckon that growth over the next 12 months is likely to be more sustainable though lower than the pre-crisis performance.

According to Morgan Stanley India, corporate earnings should recover because economic activity has clearly rebounded (particularly in China, India, Brazil, Indonesia, Poland and Israel). There was a 14-month period of earnings recession, Morgan said, but that seems to have ended with the quarter ended September.

Another reason India and some other emerging markets look attractive is that currencies have risen significantly against the dollar since the second quarter, boosting the dollar value of local earning streams. “Our top-down earnings model currently forecasts the earnings per share to grow by 28% in dollar terms during calendar year 2010. This places the MSCI Emerging Markets index on a prospective 2010E P/E of 14.4 times,” a Morgan report says.

Barclays Capital predicts that the currencies of India, Korea, Taiwan, Brazil and some other emerging markets will appreciate further.

Barclays also believes the rally in markets will continue. Valuations are, of course, far less compelling than they were earlier this year. But it doesn’t think valuations are yet overly stretched.

The FII, however, adds a note of caution: “The time may very well come when valuations and investor positioning make emerging asset markets vulnerable to a sharp correction – it may even come before the end of the current quarter but it is yet to arrive.”

Tata group set for consolidation again

A fresh round of consolidation is in the offing at the Tata group. India’s largest private conglomerate is looking to integrate some of its smaller businesses with their respective flagship companies, with a view to leveraging the value of the entities and increase cost efficiency.

The earliest of the consolidation could be the merger of Tata Coffee and Mount Everest Mineral Water with Tata Tea; Rallis with Tata Chemicals; Tata Teleservices (Maharashtra) with Tata Teleservices; and Tata Sponge Iron with Tata Steel, two executives familiar with the development said.

The idea has been discussed in at least two recent board meetings of Tata Sons — the holding company of the group, and also at the individual company level, an executive with the group said.

THE URGE TO MERGE (Merger candidates in the Tata group)
MOTHER FIRM	SIMILAR BUSINESSES
Tata Tea	Tata Coffee and Mount Everest Mineral Water
Tata Chemicals	Rallis
Tata Teleservices	Tata Teleservices (Maharashtra)
Tata Steel	Tata Sponge Iron and few others
Retail (functional integration)	Trent (Westside), Infiniti Retail (Croma), Titan & Tanishq

“The group is looking to appoint external agencies to study the possibilities of mergers or consolidation,” he added.

Asked about the consolidation process, a Tata group spokesman said, "Tata Sons does not wish to comment on such speculation."

The fresh round of consolidation would be the second such exercise after Ratan Tata took over chairmanship in 1991. Though the exercise saw the number of companies fall to 96 from over 250, the group still has over 300 subsidiaries in 40 businesses spread across various parts of the globe.

“The consolidation is intended to ring-fence businesses from economic instabilities. At the peak of the downturn, the smaller businesses had struggled and many of them posted losses. The new merger initiative will help the major Tata companies scale up operations and enhance bargaining power,” said another source outside the company.

Tata Tea is in the process of creating a new enterprise with a turnover of $10 billion, 10 times the current figure, by 2014. It is in the process of creating a new brand for its beverages business, giving emphasis to smoothies, juices and so-called “functional drinks”, in addition to tea and coffee.

About Tata Coffee’s merger with Tata Tea, Vice-Chairman R K Krishna Kumar recently said, “Our vision is to have one cohesive company.” Shares of Mount Everest Mineral Water, a low-profile Tata group company, have been rising following market buzz that the promoters have been accumulating shares through creeping acquisitions. Last month, Tata Tea acquired 55,000 shares to raise its stake to 40.3 per cent, which was 33 per cent as on September 2008.

Rallis and Tata Chemicals have some common lines of businesses, offering synergies in terms of complementary products.

Last month, Rallis announced preferential allotment of 980,000 lakh shares to its promoter Tata Chemicals. The preferential allotment will increase the promoter holding by less than five per cent in the financial year 2010. Tata Chemicals emerged as the single largest shareholder of Rallis after it purchased 35.68 per cent stake from its group companies such as Tata Tea, Tata Sons, Tata Investment Corporation and Ewart Investments in August.

The merger of Tata Teleservices (Maharashtra) with Tata Teleservices is also being considered by the group, but it could take time as the Maharashtra operator is a listed entity. Earlier this year, Japanese telecom major NTT DoCoMo picked up 26 per cent stake in Tata Teleservices and later 12.12 per cent stake in Tata Teleservices (Maharashtra) also. The move indicates a possible merger, said sources.

Tata Steel, which is integrating its operation across the globe including Corus, NatSteel and Tata Steel (Thailand), has also discussed merging Tata Sponge Iron and other similar companies with it, said sources.

Tata group also plans a functional integration of its retail formats like Westside, Croma, Tanishq and others. Krishna Kumar recently said the different retail formats will be integrated at a "functional level" to share experiences and expand know-how within the business.

“Consolidating the value, which is dispersed between the companies, will leverage the balance sheet and debt raising capacity. Also, this improves the credit ratings when a company goes for debt or bond issues,” said an expert with a law firm.

The group, which has 98 companies, had streamlined its companies under seven business verticals such as information systems and communications, automotive and engineering, metals, services, energy, consumer products and chemicals. It also sold its soap, cosmetics and publishing interests about five years back as part of its plan to exit disparate businesses.

Domestic institutions turn cautious

Take out Rs 2,600 crore this month.

Rajalakshmi Sivam

BL Research Bureau

Domestic mutual funds and insurance companies which had a strong hand in the market rally post-elections seem to have turned cautious of late. Domestic institutional investors have, for the first time after May, turned net sellers in the stock market this month. In the 13 trading sessions in October, domestic institutions have taken out over Rs 2,600 crore on a net basis. This is the largest single month withdrawal since January 2008.

In fact, the pessimism of domestic institutions seems to be shared by retail investors, with the latter taking out money as well. The markets have been rising mainly on the strength of FII inflows of Rs 4,224 crore on a net basis, so far this month.

Cautious take

Domestic institutions had been pumping fresh money into the markets for the last four months putting in Rs 14,207 crore in total, unmindful of how FIIs behaved. Even in July when FIIs withdrew Rs 1,365 crore from the market, domestic institutions were investing and helped the Sensex close 8 per cent higher, by bringing in over Rs 5,800 crore.

Retail investors

But the situation has changed in recent weeks. From the average Rs 4,000 crore brought in every month between June and August, domestic institutional investment in the market in September dipped to Rs 770 crore and turned to net sales in October.

Retail investors haven’t participated in the market’s rally since March and have pulled out Rs 13,355 crore (net) between March and now. Even in the post election surge that took markets up in May, retail investors didn’t join in. In September they took Rs 4,285 crore out of the market and in October till date they have pulled out Rs 462 crore.

IPOs remain dull

It needs to be mentioned that retail participation in recent IPOs has also been lukewarm, with even the over-subscribed Indiabulls Power offer seeing its retail portion subscribed just over one time.

SIP investment: Better than one-go

Suresh Parthasarathy

Systematic investment plan (SIP) investors have reason to cheer. The ongoing rally in equity market has pushed up the one-year return on such investments sizeably, compared to lump-sum investments.

The comeback has even pushed up annualised returns on SIPs over a three-year period. Those SIP investors who opted for mid-cap-oriented funds have reaped a richer harvest then their large-cap peers.

Business Line picked up the top five large- and mid-cap schemes that have a long-term track record and analysed performance over one- and three-year periods. Among the large-cap schemes either through lump-sum or SIPs, the HDFC Top 200 Fund tops the return charts over one- and three-year periods.

Those who stayed invested in SIPs over the past year notched up absolute returns of 140 per cent while those who preferred lump-sum investment could have earned 90 per cent, substantially lower than those who bought SIPs.

The other top performers for the one-year period are Birla Sun Life Frontline Equity, which clocked an absolute return of 130 per cent, and Magnum Contra with 123 per cent. Both the schemes returned 40-50 percentage points more on SIPs compared to lump-sum investments.

In the mid-cap space the return generated by Birla Sun Life MidCap and Sundaram BNP Paribas Select MidCap were at 173 per cent, while those who made lump-sum investments a year ago, would have got returns of 108 per cent and 101 per cent respectively.

The SIP return of Franklin India Prima Fund and Magnum Midcap were identical at 147 per cent. Returns on lump-sums too were identical over a one-year period, at 86 per cent.

Timing makes difference

The returns generated by Franklin India Prima Fund, Magnum Midcap and HSBC Mid cap over a three-year period still look low despite their stellar one-year performance. The three-year annualised return of the all the three schemes is 6-14 per cent on SIPs and 0.5-4.0 per cent for lump-sum investment.

The returns from SIPs buttresses the point that timing of entry and continuing with investments in a falling market made a big difference to returns.

Templeton India Equity Income Fund: Invest

Investors looking to diversify their portfolio to include stocks outside the Indian market can consider taking exposure to Templeton India Equity Income Fund (TIEIF). The fund’s value-based investing approach with a focus on stocks with high dividend yield, overseas exposures to sectors that are under-represented in the domestic market and a fine performance track record underpin our recommendation.

The fund may, however, be best suited for conservative investors only, given its value investing philosophy. While this strategy may (as it has in the past) help it manoeuvre a falling or volatile market well, it may also keep the fund from joining in the momentum in a sustained rally. We therefore suggest phasing out exposure to the fund by way of SIPs.

Performance: Templeton Equity Income has beaten its benchmark, BSE-200 in the last one year as well as over longer time frames of two and three years. What’s more, it has also comfortably beaten the returns delivered by the Sensex over both one and three-year time windows – a feat not matched by many international funds.

Over the last three years, the fund has on a monthly rolling return basis beaten its benchmark six out of ten times. It has fared particularly well during periods of high volatility in the market in 2008, gaining more than the index during the rallies and losing less than it, during the corrective phases.

The fund’s mandate, which allows it to pick high dividend yield stocks from overseas markets, also gives it an added edge over similar domestic funds, since Indian markets per se proffer a limited universe of such stocks. However, the fund has underperformed domestic ‘dividend yield’ funds such as Birla Sun Life Dividend Yield and UTI Dividend Yield over the past year.

The latter’s taking to debt last year as also the fact that Indian market has been among the top performers in the rally so far may explain TIEIF’s lower returns.

Portfolio: Though the fund’s portfolio hasn’t really seen a lot of churn, it has seen periodical rebalancing.

The domestic component of the portfolio, which predominantly features large-cap stocks, has in the last year shifted weights across stocks such as Tata Chemicals, ONGC, Sesa Goa, Bharti Airtel and ICICI Bank.

The fund has select representation from stocks of the mid- and small-cap genres as well.

While it has a high exposure to financials, it has, in its latest portfolio, accorded the highest weights to fertilisers and oil and gas.

The overseas component, which is now down to 28 per cent from 31 per cent in March 2009, also has a fair sprinkling of different sectors, a good part of it being new additions.

FIIs hike stake even as promoters cut holdings

Realty, banking sectors among favourites.

Aditi Chandrasekhar
K.S. Badri Narayanan

Chennai, Oct. 20 The momentum in the Indian stock markets with favourable currency movements appears to be a big draw for foreign investors. Of the companies that have so far released their September shareholding pattern, every second company saw its FII stake rising. Promoters have been using the rally to cash out as one-third of the companies have seen promoters’ reducing their stake.

Of the BSE-500 companies, 255 companies have so far released shareholding data for September quarter; 136 have seen foreign investors adding to their holdings. Only six per cent or 16 companies saw promoters’ holding actually moving up. Around 76 companies have seen promoter holdings drop, while in 119 companies promoter holding remained the same. FIIs, on the other hand, also shed stake in 95 companies, which include a few Sensex companies.

Among the Sensex companies, FIIs raised their stakes in 8 companies and cut their holdings in 11 companies. However, the proportion of FIIs holding with respect to Sensex remained the same at 12 per cent.

Favourites

Realty, once the fancied sector for FIIs, came back into favour with several stocks seeing higher FII holdings coming in . This was followed by banking and finance. “FII money is basically routed in through the stock market and QIPs. The latter has been seeing some very active placements, which account for the additional increase in holdings,” said brokers.

A weakening dollar is cited as one of the reasons. With the dollar weakening to new lows, investing in dollar assets may lead to lower effective returns for investors than investing in emerging markets, with their rising currencies.

“There are two major conflicting forces in the markets right now – market momentum and valuations. While the power of the momentum on the back of increasing corporate earnings works to pull in investors from abroad, current valuation trends are making them cautious,” according to Mr Saurabh Mukherjee, Head of India Equities, Noble Group.

“The rally has reached an advanced stage since March 9, and the market will continue to see a battle between these two forces. However, growth-based momentum is the stronger of the two; this will ensure consistency in FII inflow pattern,” he added.

Promoter holdings

“Promoters generally tend to raise stakes in a bear market and shed in a positively-charged bull run to take advantage of market forces. And so, promoter behaviour could serve as a meaningful indication of valuations,” said Mr Mukherjee.

SEBI allows stock exchanges to go 9AM to 5PM

The Securities and Exchange Board of India (SEBI) on Friday allowed stock exchanges to extend trading time by almost two-and-a-half hours, permitting them to operate between 9 a.m. and 5 p.m.

An NSE official said the extended trading would commence “very soon” on that exchange, although he would not commit to a specific date. The BSE too “welcomed” the move.

“It has been decided to permit the stock exchanges to set their trading hours subject to the condition that the trading hours are between 9 a.m. and 5 p.m. and the exchange has in place risk management system and infrastructure,” a SEBI circular said. SEBI had earlier said that this was considered to allow Indian players to take advantage of the global information flows.

Currently the cash and equity derivatives market is open from 9:55 a.m. to 3:30 p.m. The currency derivatives market is open from 9:00 a.m. to 5:00 p.m., while the commodity derivatives market is open from 8:00 a.m. to 11:30 p.m.
Stock brokers unhappy

The stock broking community greeted the news rather bitterly. There was some consternation that the move might benefit only the larger players such as FIIs and the exchanges themselves, as volumes would increase with stretched trading hours.

“This extension was really not needed and the existing hours of trading were enough,” said Mr Dharmesh Mehta, Head of Broking at Enam Securities, while some other brokers said that theoretically an increase in trading hours could mean higher volumes and profitability for brokers.

While this move does align the Indian market its global counterparts, FIIs, especially London-based ones, stand to benefit the most as they can hedge risks best as they have better global information flow, said brokers.

Retail investors too seemed unenthusiastic. “It doesn’t really matter whether the markets run for five hours or seven hours as a retail investor needs to buy or sell at a certain level and for that the current trading hours were sufficient,” said Ms Vanita Joshi, a regular retail investor.

130 firms trade at all-time highs on BSE

Stocks of 127 companies on the Bombay Stock Exchange (BSE) have raced to touch their lifetime highs this month, even while the key domestic benchmark index, the 30-share Sensex, is still well below its all-time high of 21,000 that it had touched in January 2008.

The list includes 68 penny stocks on BSE which had a share price below Rs 10 trading near their lifetime highs. Another 512 stocks hit their 52-week highs on BSE, indicating a broad-based rally in the markets. Among the 'A' group stocks trading near their all-time highs are Bank of Baroda, Bajaj Auto, Cipla, Colgate, Dabur India, ITC, Jindal Steel, Punjab National Bank, Sesa Goa and GAIL.

Market experts said while the Sensex stocks had moved up sharply since March 2009, some of the small and mid-cap stocks had caught up with the rally only in the past couple of months and had still managed to touch their lifetime highs. On Thursday, both the BSE mid-cap and BSE small-cap index hit their 52-week high of 6,572 and 7,638, respectively.

Among those hitting lifetime highs are also stocks under surveillance or in the trader to trade category on BSE. This includes Duke Offshore, Global Capital, Krishna Deep, Linkson International, Pace Textiles, Parsharti Investments, S V Electricals, Sampada Chemicals, Sarthak Global, Simplex Trading, Splash Media, Urja Global and Veritas. Stock in the trader to trade category attract the five per cent circuit filter and delivery in these counters are compulsory. According to brokers, some of these counters under surveillance are highly operator-driven and traders should be cautious while buying these scrips.

Reliance Industries among top 25 'global champions'

The country’s most valued company, Reliance Industries, has been named among the top 25 global champions for 2009, which managed to outperform the competition in midst of meltdown in the financial markets. Reliance Industries is the only Indian company in the 25 A T Kearney Global Champions for 2009 list, which has been topped by Japanese firm Nintendo, followed by US-based Google and Apple at the second and third positions, respectively.

Even as the proportion of companies headquartered in emerging countries has dropped from 40 per cent in 2008 to less than a third (33 per cent) in this year's list, Reliance Industries along with Mexico's America Movil managed to maintain their status as Global Champions, A T Kearney said.

RIL has been ranked 11th ahead of global biggies like Jacobs Engineering, World Fuel Services, ABB, Amazon.com and America Movil. The list includes firms which managed to outperform the competition in the midst of the meltdown in the financial markets, as they combined long-range strategic planning with nimble execution. "The financial crisis has accelerated the rate of change in underlying global business conditions," A T Kearney Chairman and Managing Officer Paul Laudicina said.

It’s All About Size

Mergers and acquisitions reorder the list of India’s most valuable companies

By

If it ain’t broke, don’t fix it.” Sensible advice, but attempting to improve things that are doing just fine, is necessary when ground reality changes. So it is with the BW Real 500, the definitive ranking of India’s biggest companies. BW’s methodology combines the long-term track record (as reflected in total assets) and current performance (as reflected in total income) of India’s biggest companies to bring out the true extent of their size. That way, companies that have put in a lot of money into projects to create huge asset bases, but are yet to earn income from them are given their true worth in the rankings.

This year, however, there has been a significant change in the methodology — we used consolidated numbers of companies and their subsidiaries and associates to assess the true size of a business enterprise. It was the need of the hour. Indian companies had gone on a merger and acquisition (M&A) binge in 2007-08, even of companies much larger in size — think Tata Steel-Corus, Hindalco-Novelis, etc. Some big-ticket M&As happened last year too, the most significant being Tata Motors’s buyout of marquee UK luxury car maker Jaguar-Land Rover. Taking standalone results would no longer paint a true picture of their real size.

The results have been eye-opening. Expectedly, companies that had big M&As to show jumped up the rankings much more than those who grew only organically. For example, had the rankings continued on a standalone basis, Tata Steel would have had a size (total assets + total income) of Rs 96,484.45 crore this year. However, with a consolidated size of Rs 2,70,469.80 crore, the company has leapfrogged to the rarefied club of India’s five biggest companies, at No. 4.

The story is repeated across the other big M&A companies: Hindalco Industries (standalone size: Rs 56,547.85 crore; consolidated: Rs 1,34,103.08 crore); Tata Motors (Rs 68,500.17 crore; Rs 1,54,713.52 crore). The total size of India’s 500 biggest companies increased by almost 42 per cent this year compared to last year.

What has also happened is that companies that did not necessarily have big-ticket M&As but have several subsidiaries, also jumped up the rankings. Take auto major Mahindra & Mahindra (M&M), for instance (its buyout of Satyam Computers is not reflected in its consolidated accounts yet). With the numbers of its many subsidiaries in areas such as technology, trading services, even steel, adding muscle to its accounts, M&M’s size grew to Rs 60,995.39 crore this year from Rs 23,663.25 crore last year, pitching it into rank No. 19 (from 34 last year). There have been other significant jumps, too (see ‘Galloping Ahead’ on page 42).

One other fallout of the change in methodology has been that many companies that were in the BW 500 listing for long, and are still large enough to waltz into the rankings on their own, have now exited simply because they are subsidiaries of other companies. These include Mangalore Refinery & Petrochemicals (ranked a high No. 15 last year, a subsidiary of Oil & Natural Gas Corporation); Chennai Petroleum Corp. (No. 17 last year, subsidiary of Indian Oil Corporation); Hindustan Zinc (37, Sterlite Industries); Ultratech Cement (66, Grasim Industries); TVS Motors (122, Sundaram Clayton); and Tech Mahindra (123, M&M).

Whether the big M&As have added value, rather than only size, to the companies concerned is another matter. “The acquisitions have not been brilliant successes,” says Jayesh Desai, partner at Ernst & Young. “All of them borrowed money, leveraged themselves hugely. I would still strongly defend the Corus acquisition, because it changed the game for Tata Steel, but not the others.” Apart from integration issues — there are rumbles of discontent already among Corus’s employees, for instance, regarding bonus payments — the most immediate impact of the M&As is on profitability of the companies. According to Centre for Monitoring Indian Economy (CMIE), Hindalco’s standalone net profit for 2008-09 is a handsome Rs 2,002.79 crore. But with Novelis and other subsidiaries’ numbers consolidated with it, net profit shrinks to a piffling Rs 46.74 crore. The story is even more dramatic for Tata Motors — standalone net profit Rs 936.96 crore; consolidated, net loss of Rs 2,502.70 crore.

Compared to last year, when companies were assessed on a standalone basis, net profit for all companies that comprise the BW Real 500 in 2009 has shrunk by almost 10 per cent, indicating that not all is well with India Inc.’s myriad subsidiaries and associate companies. Last year, net profit had shot up by almost 50 per cent.

Shareholder value, too, has taken a knocking, with only 15 per cent of the 500 companies showing positive three-year shareholder returns. Last year, it was 75 per cent. Total market capitalisation of the 500 companies fell 41 per cent compared to last year, and the median market capitalisation fell by more than 60 per cent.

This kind of churn and impact changes companies’ positions on various parameters substantially. To give you a clearer picture, we have also ranked the top 100 companies by net profits (see page 76) and by maximum shareholder returns (page 71), and top 50 companies on the basis of return on assets and price-earnings ratio (page 77). For the icing on the cake, we have leveraged the power of the internet to present to you a host of ratios on our website, www.businessworld.in. We have used CMIE’s Prowess database to compute statistics such as profit per employee, net non-performing assets (NPAs, for banks), cash profit to total income, raw material turnover, cash to current liabilities, and many, many more.

With inputs from Sourav Ray

URL for this article :
http://www.businessworld.in:80/bw/2009_10_24_Its_All_About_Size.html

Big dips: How to choose stocks in a downturn

The Nifty's fallen 15% since its highs, and even then I had said that it was not undervalued. I seem to put my foot in my mouth when I comment but I still maintain that we are not overvalued.

Currently, the Nifty has a P/E of 18. This may not sound significant but from what I see, nothing much has changed in the earnings growth area! Meaning, I still expect to see growth of over 25% in the top few companies (which comprise the Nifty) and this means that there is still value in these companies.

Tata has acquired Corus at a 12 billion dollar value, and Suzlon and Hindalco are also paying big money for their acquisitions. This will hit their books in the short term, but provides excellent long term value for all these companies, mainly because the integration will give them lower costs and higher margins.

Reliance and IPCL will merge and the benefit will entirely go to Reliance. Think about it - IPCL has a P/E of less than 6, and Reliance is at about 18. IPCL has past 4Q earnings of Rs. 50 (approx) per share, which adds to Rs. 1300 cr. of profit over the last four quarters. The combined entity, if you add up the last four quarter profits, will have 11,857 cr. of profits, giving an EPS of Rs. 82 per share. At the current price of Rs. 1285, RIL shareholders will have a company of P/E 15 or so - which, at the rate it's been growing, is remarkably cheap. I am personally buying RIL shares on a regular basis nowadays.

Now, what am I saying? Should you just go and buy any company because the Nifty seems undervalued? Well, no. Like in the RIL-IPCL case above, make your decisions based on future potential.

A lot of companies will seem like bargains to you now. Bajaj Auto at 2500! It was up to 3000 a couple months back! But that is no reason to buy, because 3000 could have been simply too high an expectation. In the face of rising interest rates, people will have lower leverage to buy vehicles, so the growth may be tempered. Plus, with the world cup around the corner, Hero Honda, a prime advertiser, is likely to put a lot of heat on Bajaj. So perhaps Bajaj is not the best bet today.

Another example: SBI is at 955, and just three months ago it was above 1200. That's a 20% drop and may look like a darn good deal! Unfortunately, interest rate hikes and slowing growth in retail lending will take its toll, and perhaps SBI will not grow at 20% or more in the next few months.

But there are others which sound just too good to be true. BHEL for instance, has an existing order book of 30,000 cr. Plus, the government wants more ultra mega power projects, which BHEL has a lot of expertise in. And the growth seems less dependent on interest rates or competition pressure, so the earnings visibility is fantastic. Add to this the fact that they've announced a 1:1 bonus (likely to be decided by May) and that their price is now at Rs. 2,000 (a P/E of 24). At the current price this seems like a great buy!

Disclosure: I own all the stocks above. And none of these will give you benefits overnight or within three months. Think of this as investments that will pay your medical bills when you are old.

If you find a vendor selling apples cheap, will you buy the half rotten ones that were ripe a few days back? Or will you choose only the good ones? It doesn't matter if they are cheap, you still want good apples.

This market has a lot of value, but you must search for value that is absolutely plain and obvious to you. Don't buy based on other people's tips, or what you remember of the stock price during the boom.

And if you find a good stock, please let me know too. Perhaps we can share and earn a lot more together!

Are you saving or investing?

There are two kinds of people, really - those who have extra money left over at the end of the month, and those who don't.

I'm assuming you're one of the former, otherwise you shouldn't even be here. So what do you do with what's left over?

1) Do you put it in a bank account, and spend it whenever you have a big purchase like an LCD TV, an iPod, a camera?
2) Do you make a fixed deposit every month (or once you have a large sum)?
3) Do you buy mutual funds, shares, or other investments?

1) is a Saving. 3) is an Investment. 2) is "saving" according to me (but others will think of it as an investment) There's a difference.

An Investment is where you can grow your money significantly above inflation, after tax is applied. Remember that quoted inflation is around 5% but for real terms, it's around 6.5% a year. That means your money needs to grow ABOVE That for any real returns. An investment MUST carry some amount of risk; assured returns are usually negative post-tax and post-inflation.

Savings are everything else. Money in the bank, in a fixed deposit, hidden in your pillow etc. Even bonds and debt mutual funds, in my opinion, are "savings" - they hardly return more than inflation post tax.

You might think "No! A fixed deposit can grow at 8% a year!" Reduce tax on that amount at 30%, you'll get 5.6% left over. That's still less than inflation of 6.5%.

Shares and equity/balanced mutual fund units are investments. They carry a large amount of risk, but have the potential to grow much more than inflation. Gold and other commodities are investments too, and so is real estate, paintings (art) etc.

Within investments you have two types: cash-flow and value-appreciation. Cash-flow means you get money ever so often; royalties from books, dividends, rent (from real estate) etc. Cash-flow income is usually called "passive income"; meaning you don't have to work for it.

Value appreciation is growth in the intrinsic value of what you buy. (Note: Cars, iPods etc. are not investments. They lose value from the minute you buy them!)

Most people usually buy for value appreciation, since there are limited cash-flow options available. In India for instance, both dividends and rents are around 3% post-tax, and that's no fun. But there are a few companies that consistently give 10% dividends, and places where you can get upto 7% as rents. You just have to look harder.

Investments are your future. Savings are your present. Straddle the two - keep around 40-60% of your money in investments and the rest in savings. You need your savings to build up your purchases and pay extraordinary bills (like a pregnancy or hospitalisation), but don't forego your investments either.

If you want to ensure a stable future, invest more. Key check:
1) It should "appreciate" in value (either through cash flow of value appreciation)
2) It should have an element of risk.
3) It should have the ability to grow more than inflation.

Stock Ideas

A stock screen is a filtered list of stocks which is arrived at according to some criteria that are likely to remove less investment-worthy companies from the list. They throw up investment ideas which can then be evaluated closely. Membership of BSE 500 index is basic qualification for our screen.

High Dividend Yield Stocks
Dividend yield measures the amount of income received in proportion to the share price. It is calculated by dividing the annual dividend income per share by the prevailing share price. This is one of the most important ratios that value investors take into account. Stocks often have high dividend yields if they are trading at relatively lower price (the denominator in the calculation). The high dividend-yielding stocks tend to under-perform during the bullish markets, as the growth oriented stocks race ahead. But they can prove to be quite valuable during times of uncertainty. This was evident during the years 2000 and 2001, when the markets were going through a slump. To illustrate, the top 15 out of BSE 100 stocks, selected on the basis of their dividend yield at the start of 2001, fell by just 2.45 per cent in that year, while the Sensex lost close to 18 per cent.

Therefore, such stocks can be your friends during the times of an economic slowdown. We screened for the high dividend-yield stocks in the universe of BSE 500 constituents. Our screen lists the ones with a dividend yield of 6 per cent or more, and a track record of dividend payout in each of the last five financial years.

The list is sorted in the descending order of dividend yield.

Relative Value
Our relative value screen aims to identify stocks whose earnings have grown at a faster pace than an average peer while they still trade at a discount on a relative basis. Our criteria requires that the PE ratio of a stock should be less than the industry average, while the three-year and one-year average annual growth rate of EPS should be higher than the industry average. It must be noted that we have used the median PE (and not the arithematic mean) as a measure of industry average PE. The logic behind this is that the presence of outliers distorts the arithematic mean to make it less representative of the industry average. To make the averages more meaningful, we restricted our search to only those industries which have least 20 companies out of the BSE 500 constituents.The list is sorted in the ascending order of PE ratio.

Fund Action
Media stocks attracted a lot of attention from fund managers. Prominent stocks in this space like Sun TV, HT Media and Jagran Prakashan figured among the most bought stocks. Steel was another sector which funds bought into heavily. Here Sail, JSW Steel and Monnet Ispat were among the favourites.

Zicom Electronic Security Systems is another stock which found favour with fund managers. This small cap stock has been held Magnum IT since long, but now Magnum Global and DSPML Technology.com have also bought into it. In the technology space TCS and iGATE were other two stocks to give company to Zicom. You can read about iGATE Global Solutions in detail in this issue's Stock Insight section. Other most bought stocks included banking majors ICICI Bank and HDFC Bank. On the other hand, cement stocks were at the forefront of the most sold stocks during the month of February. The fund managers reduced their holdings in prominent players like Grasim, Shree Cement, JK Cement, JP Associates and Binani Industries. It seems that measures to control cement prices announced in the budget did not go down well with the fund managers. One exception though was Prism Cement, which saw funds exposure rising by Rs 15 crore over the month.

Construction, capital goods and real estate were the other worst hit sectors. Stocks like Larsen & Toubro, Gammon, BHEL, IVRCL and Ansal Properties all witnessed heavy selling.

Shape of Things to Come

This is the editor's note that appeared in the September issue of Wealth Insight magazine. The cover story, 'Recession is Dead', argued the case for the recovery that the global economies have effected from the meltdown position they once were threatened with, especially focussing on the position in India.

Our cover story is a cheerful one. I firmly believe that at this point of time, there’s a lot more economic good news than there’s bad news. As our article points out, the recovery has defied the most pessimistic expectations and has been rapid and sustained. For equity investors, the bonanza has been tangible.

It’s not quite one year since the global crisis broke. It is clear now that last year’s collapse of equity prices had two phases. There was a ‘normal’ bear phase that started in January and lasted till August. And then there was the all-is-doomed phase in which people seriously doubted the survival of the world economy and the capitalist system and so on and so forth.

It is important to note what exactly we are recovering from. To a great extent, we’re all over-relieved at the turn of events. I freely admit that articles like our cover story are an over-reaction to the actual degree of up-turn that has happened. However, they’re also justified. We may be seeing just the beginnings of the much-cheered green shoots, but that’s a big relief from our biggest fears of last year. There are plenty of dark spots on the horizon, but none of them look like show-stoppers, and that’s very good news indeed.

The important question that then arises is how accurate is our analysis. It would be customary for a magazine editor to defend his articles and claim that they represent the best possible forecast, but I’m not going to do that. This stuff is not that certain. Some days back, while reading an article in Scientific American on the science behind economic boom-bust cycles, I came across an interesting comparison between science and economics. Economists, the article said, suffered from ‘physics envy’. Economics is not physics. Physicists have three laws that can describe 99 per cent of the world. Economists, in contrast, have 99 laws that can describe three per cent of the world. Predicting, or even recognising, recessions and recoveries is not just an inexact science, but not a science at all. We can see some signs that indicate a certain outcome, but we could easily be missing others that may be indicating quite the opposite.

So, does it look like a recovery is on its way? Yes it does. Is it a sure shot? Certainly not! However, that actually shouldn’t matter to us as investors. The collapse and recovery of last year should make it clear to us that no matter how dark the outlook at any point of time, it’s better to always be on the lookout for buying good stocks at good prices rather than be overly influenced by generalities of the economy and the global situation. To a considerable degree, choosing stocks and making investments is a relative exercise. It doesn’t matter how the whole picture looks at any specific point of time. What matters is that the actual investments you are making are better than other investments. Eventually, those companies will do well and when things turn around, you will reap the benefits.

This recession was feared to be an ‘L’ shaped one or at best a ‘U’ shaped one. In reality, it has turned out to be a ‘V’ shaped one. However, investors who try to move in and out of stocks by double-guessing stock momentum as well as the macro picture are more likely to end up with a series of ‘W’s or perhaps even ‘M’s. Or perhaps we need to look closer home. How about a IÉ or a ³? Do these shapes better describe the way your investments are behaving?

Profit From PSUs

This article is the cover story in the October 2009 issue of Wealth Insight magazine that seeks to unveil the opportunities that can arise from a more liberal disinvestment government agenda, which will open various investing opportunties for investors in the near term. We showcase the article in the light of the Prime Minister Manmohan Singh underlining the crucial need of doing so on October 15. He said: "The government is encouraging the listing of public sector enterprises as this unlocks the value of a company, improves its corporate governance standards and also helps it in raising resources for funding future expansion plans."

We unveil here the 10 best investment options in the PSUs space, one per day.

Indians are once again being swamped by the talk that dominated the first 50 years of our country’s existence. The words being mouthed are public sector undertakings (PSUs). The difference is that the conversation has shifted from the political world to the world of investors, and yes, from erstwhile negative connotations to profitable ones.

While back in those days we had politicians ordering us to accept it as a fact that PSUs are good for everybody’s well-being, today, it is the stock market trader, private analyst, and the media that are saying wealth is waiting to be unleashed on the smart Indian investor, once the current political power centre signs on the dotted disinvestment line.

What disinvestment refers to is the dilution of government stake in PSUs, in favour of the public that would bring new PSUs to list on stock markets, or already-listed ones will see further stake sales.

While shareholders are expected to benefit from the unlocking of value of the PSUs, the PSUs themselves will benefit from the greater adoptability of private management practices. Most of all the very fact that a PSU is listed increases its transparency and accountability quotient, making it responsible to shareholders and to the market regulator.

The situation prevalent in the last century has almost no bearing on the current one (from that of welfare maximization to profit maximization). Nevertheless, from an imperfect past, PSUs have traversed the entire gamut of performances to stand today at the forefront of the creation of a new and modern India, again. Here then, is the new PSU story:

POSITIVE POLITICAL PULL

With a patchy record on disinvestment in its first 5 years in power, the UPA government is looking to underline its importance as a liberalizing force.

Just days before Budget 2009 was presented, it was announced that the state must raise a sum of ‘at least’ Rs 25,000 crore each year by selling between 5-to-10 per cent of its share in PSUs. But good government intentions mostly get derailed and actual receipts from targeted amounts have always fallen short.

PRESSURE POINTS

There are a number of immediate and long-term factors that have predisposed the government towards disinvestment:

Money-Making Opportunity: Disinvestment call can no longer be ignored by the government. Most immediately, under the current economic situation, divestment will help India relieve the fiscal deficit pressure.

Market Pressure: Another compulsion for disinvestment is coming from the Securities and Exchange Board of India (SEBI) — it wants new norms in place that stipulate a minimum of 25 per cent of a company’s shareholding to be present in the public realm. Its intent is to enable a systemic transformation that will address the problem of the shallow nature of Indian stock markets. PSUs disinvestment can provide the depth and width to the capital markets, leading to lesser speculation and volatility.

Raising Reach: There is an increasing amount of frustration in the Indian households, where there are a limited number of money-making investment vehicles available. The percentage of Indian household savings currently invested in the capital markets adds up to just 5 per cent. India’s household savings have risen to above 37 per cent, and the divestment agenda will get these fallow funds into the productive zone.

PSU POWER-PLAY

PSUs boast of some very strong fundamentals. They were intentionally intended to do so as they had a mandate to achieve the commanding heights of the economy. Check out the big numbers:

Generating Growth: In 1997-98, central public sector enterprises (CPSEs), whose records are best tracked, generated a net profit of Rs 15,000 crore. By 2007-08, the same had charged up to Rs 80,000 crore. Over the last 10 years, the net profit generated has grown at a CAGR of 19.37 per cent.

Even in 2008, the 18 Navratnas performed quite well, with the average total income growing (YoY) by 13 per cent to Rs 6,871,624.97 million, which translated into a net profit of Rs 614,750.86 million (net profit grew by 9% YoY).

Sustaining Size: The top 18 PSUs have an income that tots up to a mammoth 15 per cent of India’s gross domestic product (GDP). Out of top 10 companies in India, 6 are PSUs. They stack up powerfully on the bourses too, where one out five companies in the Nifty 50 are PSUs. PSUs serve shareholders well too, paying over 33.5 per cent of their net profits as dividends.

Garnering Gains: The numbers involved from a disinvestment exercise will be huge. For instance, the market value of 55 listed PSUs is $311 billion. The government holds an average of 80 per cent stake in them and as such its share is over $250 billion. According to a Morgan Stanley report, the government can pocket as much as $163 billion if it dilutes its stake by 51 per cent (both listed and unlisted PSUs).

OUTPERFORMERS

Investors must scrutinize exactly how a disinvestment drive in a particular company may affect its overall performance. While there is no separate road-map to gauge the amount of profits that a divested PSU may deliver, applying some orthodox, and other, methods can throw up a fair idea.

Here are a few suggestions:

Monopoly Power: To start off, the biggest indicator to a PSU performance is that, in an age of democracy, they are monopolies. Aside from the command and control capabilities, their strength in powering overall economic growth is also comprehensive. These PSUs were dreamed up during the Socialist proclivities of the newly-independent Indian rulers. The result was that PSUs got to span areas or sectors that today form the core of the India growth story. It is a well-known fact that the government always gives precedence to a PSU while allocating projects. Such patronage could prove crucial in driving valuations. It would pay therefore, to identify the movers and shakers in this space.

Changing of Guard: After the divestment process, will the management remain within the public sector or will there be a passing on of control to private hands? If the government is divesting a small stake, all it is going to do is increase the floating stock in an already listed company, while it will do nothing to improve its working ethos.

In case of a passing of control to private management, the agreement should be scrutinized for clauses banning retrenchment of surplus manpower. A free hand for the new management is imperative to change the outlook of the company in the markets.

Investors must also check whether a new policy-change era lies around the corner. Free market competitiveness is not really a strength PSUs are known for; just look at BSNL vis a vis Airtel, Vodafone and others.

Diversified in Detail: The government’s share of the core sectors’ pie translates into a 17 per cent control over the oil sector, 16 per cent in power, 16 per cent in banks, 10 per cent in minerals & mining, 10 per cent in trading, 8 per cent in industrial capital goods, 8 per cent in petroleum products and 5 per cent in ferrous metals. This indicates the wide range of activities that PSUs are carrying out and that spells good for the kind of diversification that no corporate can boast of.

Productivity Enhancer: A routine research effort will unveil whether the PSU bound for divestment is a technologically superior corporate. If it is running on obsolete technology/ machinery then the chances of it improving its valuation gets reduced considerably. But there still are some PSUs where a little bit of change in technology, work systems, marketing etc., will go a long way in increasing value and that must be looked out for.

Product Profile: Exactly what kind of products the PSU is using/creating is also crucial to the unlocking of value. If the PSU is a raw material supplier, its fortunes will depend on how well the buyer of the commodity is doing.

Incentive to Advance: Perform- ance-linked incentives that have been introduced in the public sector are value-creators too. Incentives apart, the public sector pay packets can now be said to rival their private sector counterparts to a large degree and that should go a long way in raising performances.

We unearth here the best investment opportunities in PSUs space. We will showcase 10 PSU Gems over the next few days:

1. Bharat Electronics Limited (BEL)
2. Bank of India
3. Bharat Heavy Electricals Ltd. (BHEL)
4. Balmer Lawrie & Co.
5. Indraprastha Gas

The Investment Game Plan

A little insight into how you should invest.

1. Figure out where you are

The first thing to do is to prepare a personal balance sheet of sorts. Describe your assets - which is what you would call anything you own that is of real value. That means a house is an asset, money in the bank is an asset and stocks/mutual funds are assets. Your TV is not an asset. Your car should not be considered an asset (unless it's less than 3 years old, in which case consider the value declared to insurance).

So add all the values up and you get a list of assets, like so:

Assets
Cash in bank: Rs. 50,000
Fixed Deposits: Rs. 200,000
Stocks: Rs. 150,000
Mutual Funds: Rs. 70,000
Gold: Rs. 20,000
Current value of house: Rs. 25,00,000
EPF: Rs. 8,500

TOTAL: Rs. 29,98,500

Underdeclare values of stocks, gold etc. by at least 25% since these are variable commodities.

Now figure out your liabilities. Meaning, how much do you owe other people?

Liabilities
Oustanding housing loan: Rs. 20,00,000
Personal Loan: Rs. 100,000

TOTAL: Rs. 21,00,000

Don't include things you intend to pay back immediately, like credit card bills, or phone bills etc.

Subtract your LIABILITIES from your ASSETS to find out your NETWORTH: meaning, how much are you worth today. In the example above, NETWORTH = Rs. 8,98,500.

2. What's your "cash flow"?

Now find out how much you spend. Include all standard expenses (in fact, keep a record of this for about six months, and find out the real average) and also amortize your annual payments (like insurance) into the monthly amount.

Add the total income you earn (minus taxes and any other deductions)

Expenditure:
Apartment Maintenance: Rs. 2,000
Phone bills: Rs. 3,000
Petrol: Rs. 2,500
Credit Cards: Rs. 5,000
Internet connection: Rs. 1,000
Interest payment on housing loan: Rs. 11,000
Insurance Amortised: Rs. 3,000
House taxes etc. amortised: Rs. 1,000
Cash expenses: Rs. 8,000

Total: Rs. 36,500

Income: 
Salary: Rs. 45,000
Dividend: Rs. 2,500
Total : Rs. 47,000

Cash Flow: Rs. 10,500 per month.

If your cash flow is not positive, i.e. Expenditure is greater than Income, STOP RIGHT HERE. Go back to the drawing table and figure out how to reduce your expenses or increase your income - there is no other way around. Investments are only for cash flow positive people!

3. What and when do you need money? And How Much? Find out any longer term requirements to fund a large one time requirement. The way to do this is:

Ongoing: Liabilities, Rs. 21,00,000
After 5 years: School Donation for Child, Rs. 100,000
After 10 years: House repairs and upgrades, Rs. 10,00,000
After 15 years: College fees for Child, Rs. 10,00,000
After 20 years: Marriage costs, Rs. 10,00,000
After 25 years: Potential medical expenses, Rs. 10,00,000
After 30 years: Retirement, Need to have corpus of Rs. 30,00,000

Discount all these amounts by inflation of 6% a year.

4. The Investment Plan Recipe

Now's the time to act. You need to increase your network every single year to reach your goals. Your immediate goals for the next ten years are to build up a corpus for your child's education, and to clear out your loans. Always pay out your first house loan - that is the house you live in, so you must attempt to make that debt free. Further real estate can be financed by loans etc.

To finance the above goals, you have a sum of Rs. 10,500 a month, of which you invest Rs. 3,000 per month (say) in the principal of your housing loan. The remaining Rs. 7,500 must be invested.

What do you need? Here's an illustration:

Mnthly	Return	Years	Corpus	Grows to	Withdraw?	After Inflation	Remaining
7500	20%	5	900,000	3,189,560	2,000,000	2,676,451	513,109
15000	20%	10	513,109	2,909,698	1,000,000	1,790,848	1,118,851
25000	18%	15	1,118,851	5,138,964	1,000,000	2,396,558	2,742,406
30000	18%	20	2,742,406	9,586,741	1,000,000	3,207,135	6,379,605
35000	15%	25	6,379,605	16,543,093	1,000,000	4,291,871	12,251,222
40000	15%	30	12,251,222	29,358,528	3,000,000	17,230,474	12,128,054

The idea is that:

1) You get 20% on the first 10 years of investment and you increase the quantum of investment per month every five years.

2) After ten years you move money to less risky investments and get lesser return, and this goes on.

3) Every five years you withdraw the amount of money needed to finance your needs.

4) After thirty years you are left with about 3 crores, which will most likely be just enough for your current expenditure for a while.

This is an investment goal. You can see where your goals like and try to achieve them. Update your networth statement once a month, and estimate your free cash flows every three months. That way you are aware of how close you are to your immediate goals and whether you are making it or not.

Is a Rs. 10 mutual fund better than a Rs. 100 fund?

A number of people think that the unit price of a mutual fund matters when they purchase; i.e. that a cheaper unit price is better. Why? They say that they will get more units for the same money, and isn't that better?

"Number of units"
The "Number of units" does not matter at all. It is all about gain percentages. The best funds have gained some 750% in five years. What does that mean? That means if you bought that fund at Rs. 10 in 2001 its NAV will now be Rs.75 .

If you bought it at Rs. 20, NAV will be Rs. 150.

There are lots of such funds whose NAV is greater than 100 or 150 because they have performed very well.

What's the NAV?
The total NAV, or "Net Asset Value" is a simple concept - First you get the "Net Assets", which is the sum total of all the assets minus any liabilities of the fund. Meaning, add the current market value of all the shares, minus any open redemption requests and any applicable charges (like Daily fund management fee etc.) and you get the Net Assets. Divide the Net Assets figure by the total number of outstanding units and you get the unit price (called the "NAV Unit Price" or simply, the NAV).

Most web sites and newspapers call the unit price "NAV". It's actually the NAV unit price, so the phrase is confusing. Let me not confuse you any further: I will call the total assets as the "Net Assets" and unit price as the "NAV".

Now you might think, if you have a 10,000 rupees, is it better to buy 1,000 units of one fund quoting at Rs. 10 NAV, or 100 or those quoting at hundred? Frankly it's dependent on how the fund performs. If the second fund grows at 20%, your units are worth Rs. 12,000 at an NAV of Rs. 120. If the first one grows at 10%, your units are worth Rs. 11,000 at Rs. 11 NAV. What is better? Obviously the second one, but over here the NAVs are still Rs 11 vs. Rs. 120!

Lesser number of units is like small change
But what if you have a 1000 Rs. NAV? That's a problem, you think; if you want 2,500 rupees, you have to sell three units! That means you take out more than you want, right? Also what if you have 1200 rupees to invest? You can only buy one unit, right?

Wrong.

In Mutual funds you also get "fractional" units. So if you invest Rs. 1000 in HDFC Taxsaver, whose nav is Rs. 149.44, you will get 6.692 units. (Some funds even go to fourth decimal)

You can then sell fractional units also, like 1.212 units etc!

Growth is important, not unit price
What you care about is how much your money grows, not the number of units you have. It is just as difficult for a Rs. 10 fund to move to Rs. 12, as it is for a Rs. 50 fund to move to Rs. 60.